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Building Your Trading System – Part 2
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Building Your Trading System – Part 2

by ScottMarch 10, 2014

This is Scott, I’m filling in for Mole this week, and I’d like to help you start the process of building your trading systems. Over the next week or so I’ll be going through the exact process I use, most of which is adapted from the process Van Tharp and his students use which is outlined in great detail in his latest book, which I recommend. Today might seem a little wishy-washy. Don’t worry, very soon we will be down in the detail of how to come up with and generate entry techniques and optimize exits.

I see in the comment section of the previous post that people have posted some of their market beliefs. This might seem a bit silly and I know some of you just want me to break out the entry techniques, but trust me, for a system to work for you it needs to be a very close fit with your psyche. Trading other peoples systems is emotionally fatiguing unless they are a close match.

What we are going to do is clear the mental decks of all the emotional baggage that comes with initial failed attempts at trading, beartardness, guru-itis, etc so that we can see that what is underneath is crystal clear and untouched. Then we are going to think about some trading goals. Then we are going to build a system to meet those goals. Then we are going to practice trading that system until we can do it mistake free. Then we are going to place a proper business plan around this trading system and put structure in place around monitoring ongoing performance. Then finally we are going to trade for small size, increasing position size as we prove we are capable of trading the system perfectly.

What we are trying to accomplish at this stage: We want to examine our beliefs in detail and decide if they are helpful or unhelpful to our goal of becoming a professional trader. We want to commit to our goals, and commit to the process of shedding unwanted emotional baggage. We want to spend significant (as opposed to insignificant) time developing realistic system goals. 

BELIEF EXAMINATION

What I’d like you to do is grab a pen and paper (or computer) some quiet contemplative time and ask yourselves the following questions about each belief in order. If you haven’t done the belief list, get cracking.

Question 1) Where did this belief come from?

Question 2) What does this belief get me in to?

Question 3) What does this belief get me out of?

So, for example if one of my own beliefs is that “I prefer simple charts to cluttered charts” the answers are 1) This belief was influenced by my mentor Ivan, who has such skill in tape reading that the visual aids of indicators and averages are unnecessary 2) It has given me a superior tape reading skill, I can read the story that the market is telling me at a very high level 3) It has made me exaggerate the importance of tape reading and chart analysis, which truthfully is not that important to being a world class trader. It has kept me from the use of indicators, which I instinctively distrust, especially price derived indicators. In system building visual aids like indicators and averages can be much more important than for chart reading.

So you can see that this core belief has a helpful and an unhelpful aspect. Most of your beliefs will have a helpful and an unhelpful aspect. If you have beliefs which are unhelpful you need to stop before you start building your system and decide to keep them, reframe them or let them go. Examples of unhelpful beliefs

I believe that when XYZ indicator is overbought the market will retrace; I believe that XXX YYY theory predicts prices in the future; I believe the market is manipulated; I believe the little guy can’t make a living in this market; I believe the banksters are ruining this country with QE.

I’ll save a special mention for those who are enamored with methods that claim prediction. These would be things like wave theory, T theory, Gann theory, astrological methods, all of which are magnetically attractive to beginning traders, because like most of the trading related scams they promise to save you from emotional pain by predicting the future. It is unhelpful and a waste of time to examine these methods and try and convince you they are incorrect (there is a germ of truth in all of them surrounded by a ball of shit). From a system design perspective you are not looking for a prediction but simply a low risk idea. Suppose my belief is that “Wave theory tells me where the market is going next” I might answer 1) This belief came from a period when I was beginning and trading badly losing money, and wave theory promised to stem the flow out of my account 2) It gets me into looking for long opportunities in impulsive movements 3) It makes me hesitant to take trades that are against the wave count which I believe. It means that I go long periods being out of sync with the markets which is very frustrating. Also wave theory is highly subjective and it makes my methods dependent on how well I am trading at this present moment and difficult to mechanize or automate. This is the perfect example of a belief  we can reframe or eliminate. You might reframe the belief into “I believe wave theory can identify low risk opportunities at potential inflection points without predicting prices” (It can). Or you might decide to discard the belief, if you are emotionally unsuitable for discretionary trading wave theory is a weight around your neck that will drown you.

I’ll single out one belief that is the perfect example of an unhelpful belief which needs to be reframed before proper system development can take place. iBergamot was talking in the comment section about his theory that the components of the Dow and other indexes are manipulated inherently by survivorship bias to make in effect a ponzi scheme driving the market up. The truth or otherwise of this belief is TOTALLY IRRELEVANT. The important thing is “Is this belief helpful for trading”? This is the perfect example of a belief which exists just to make you feel smart, better, more in control of what is happening – when for trading well you want to feel humble and comfortable having no control and imperfect information. If you feel strong resistance to letting go of beliefs then that is a key indicator that there is a problem. Unhealthy beliefs, when you ask them to justify themselves, feel internally as though you are a 5 year old refusing to eat his broccoli “NO NO NO I WONT EAT IT! I WILL KEEP SUBSCRIBING TO THAT NEWSLETTER”. Helpful beliefs about the markets do not have the character where you feel like you have to defend them or prove them right.

Let me give you a personal example.

Belief  “I believe the Krastins patterns are a tradeable edge”. 1) This came from Ivan, who mentored me for a long time. 2) It gives me an effective toolbox with which to build systems 3) It gets me out of looking for entries which are different to these patterns, ie limit entries (since all Ivan’s entries are on a stop or stoplimit). I decided to reframe the belief into “I believe the Krastins patterns work very well in some market phases” which is a more helpful belief for me. Also, seeing how my core beliefs also kept me out of certain strategies is helpful. Ivan’s setups always wait until the market is moving in your favor, but in rangebound markets this leads you to buying the highs of a trading range and selling the lows.

Some of you may have adopted Mole’s market lens or his systems because you assume his is better than what you could come up with. Deep examination of where this came from will reveal that some of you don’t believe at a core level that you can build a high quality trading system. That needs to get cut out of you like a tumor before you proceed. It is highly unlikely you can build a system or trade someone else’s without close examination of this stuff.

So how do we go about fixing these unhelpful beliefs?

For a start it is unhelpful to call a belief wrong, and better to call it unhelpful, since all beliefs have origins in logic for our subconscious. For example if I am operating my trading account out of fear it makes perfect sense to have a guru to tell me what to buy and what to sell and where. Logical, but a deeper examination will reveal that if the belief is borne of fear and not acceptance (it could be either) it is being driven by our subconscious ego, which is never the right emotional place to trade from, and never the right way to build our trading systems.

The bottom line is that reasons borne of fear or greed or other base level emotions are childish reasons for doing anything. “I don’t like Janet Yellen because the Fed is evil” is really a childish thing to say or think. “They are bad” is a roundabout way of saying “I’m good” which reflects deep seated low self esteem and emotional insecurity. Virtually all traders who identify as “bears” have this crippled self esteem and in many cases sabotage their accounts as though their lives depended on it, because deep down their sense of worth is only “born to lose”.

There are various ways to modify or eliminate a belief depending on how deep or embedded it is. Sometimes all that is necessary is to articulate it on a written down piece of paper, and explicitly deciding to change that belief. An “out loud” or “written” commitment to change this may or may not help. This will probably be more effective if you take a few minutes to calm yourself, and notice the physical sensations going through your body. This is how I do it, which is a Vipassana Meditation which is highly effective, and I believe more effective for insight meditation than breath watching methods.

Get comfortable. You can recline on a couch, sit in a favorite chair, or if you are particularly excitable lie down with a pillow. The only requirement is don’t get sleepy.

1) Say, out loud (its easier to do out loud than mentally) which of the senses you are using right now. If the first thing that comes to mind is “seeing something out the window” that would be “seeing”. If you are hearing a car go past “hearing” “Feeling” is for sensations of the body like itching, rubbing, pressure, etc. If you have physical sensations with emotional content (like anxiety chest pains) just label them “feeling” and move one. If you are thinking just say the word “thinking” and don’t try and change it. Note every 1-3 seconds (3 seconds is a good place to start) and if you experience a strong desire to stop or a strong feeling that this is stupid then note “aversion” and stick with it.

2) After you are fluent with this process (may be 1-2 minutes may be longer) just add another layer of granularity. So instead of “feeling” you might say “itching”. Instead of “thinking” you might say “looping thought” or “scenario spinning thought” or “remembering thought” or “imaging thought”

By intensely focusing on the bare sensations that make up our experience, instead of the movie-loops and endless chatter of the mind, we begin to see things as they are and not as we would like them to be. I find this extremely useful for trading. You spend many hours in front of the screen, and spending those hours training the mind is a great use of that time instead of reloading evilspeculator! You might be about to place an order for a trade and feel anxious and worried if it is the right time to buy. Instead of letting your mind try and come up with reasons why it is right or wrong, just come back to the bare sensations making up your experience. You might note “tightness”, “chest pain”, “fear”, “aversion”, “anxiety” but the longer you keep doing this the more those unpleasant sensations will naturally pass without you mindfucking them away. You might see that the confusion you felt about the trade was just a manifestation of the fear your animal body is feeling about uncertainty or fear of loss. You wouldn’t bedgrudge your dog being scared of a thunderstorm, and it is perfectly natural for your equally animal body to be scared. Also, the endless chatter of the mind is just one more sense door for the non-existent I to experience. What I mean is that things you think are no more or less important than the things you see, hear or smell or taste. I like to conceptualize a thought as passing a billboard on a highway, interesting for a moment but gone in the blink of an eye.

What you think is NOT WHO YOU ARE! You are NOT your thoughts! Repeat as often as necessary until you get this fundamental truth about the nature of your existence

3) When, after a few minutes you can objectify your thoughts you will see that while you are labeling your thoughts it is very difficult to become “stuck” in them. If I have a looping thought that “this is stupid I need to do web research and find a better indicator”, then after labeling this “looping thought” several times you will see it becomes a little silly to continue identifying with it. It feels like someone else’s thought, which it is. At this point you can calmly conceptualize the belief you wish to examine. Go through the 3 steps of the belief examination paradigm clearly, without the useless chatter of the mind, and with the diamond clarity of your own market insight, which is perfect and always was. If you make a clear, adult decision to modify or eliminate beliefs in this state there is a much better chance of it sticking.

If you are interested in meditation I can highly recommend the excellent online resources at:

If you are looking for a teacher Kenneth Folk teaches live on popexpert.com and he is superbly knowledgeable and totally legit.

Also these two books are extremely useful.

I don’t want to meditate – I want to trade. I’m not a hippie goddammit let’s break out the trading stuff!

There are many ways to get a grip on who you are and why you think the way you do, and change the things you want to change. Trading is a mental game and working on your emotional “stuff” and training your mind is exactly the same as an athlete goes to the gym to get stronger.

You could do some psychotherapy, and I have had great insights doing “inner child” therapy in particular. Ed Seykota is an advocate of holotropic breathwork, which he does with traders through his “trading tribe” program. Breathwork is a weird lsd like trance which I have found to be useful in working through emotional trading issues. Van Tharp recommends a bunch of self-help style stuff like the sedona method, a course in miracles, etc. I’ve tried the Sedona method for letting go of unwanted ideas and it seems ok.

SYSTEM GOALS

Let’s answer a few questions before we think about the goals of the system. Do you want to trade stocks/etfs/FX/Futures? Do you want to sit at the screen all day, a few times a day at “rollover times” like Ivan does, at the start of the trading day, or at the end? How many trades do you expect to take each day/week/month?

In the context of those answers we need to spend some time generating system goals. The systems goals are NOT something to gloss over, they are something to spend a lot of time on, most likely several days. The system goals for Heisenberg were:

System to make 4R per week with no more than 3 losing trades in a row, taking on average 10 trades a week at .4R expectancy, with a 6R max drawdown at SQN greater than 3.2.

Your system goals might look something like “I want to make 30% per year compounding without more than a 6% drawdown trading only large cap ETF’s”

The Crazy Ivan (unfiltered) goals were: Make 40R per year at .2 expectancy with a max 15R drawdown.

I had the opportunity to review an excellent system with the following goals, which are articulated clearly.

There is something very strange about this process. I’ve personally experienced that the end result looks a LOT like the system goals, nearly every time. I’m fucked if I know why, since when I start designing a system I have no idea what sort of entry or exit techniques I will use.

So let’s all come up with realistic system goals. What are realistic system goals? For short term traders .2 expectancy is a viable system, and only the very best systems average above .5 expectancy in the long term. Automated systems rarely get above .25 expectancy (though I think Heisenberg will blow that away) I’d like you all to actually imagine the worst case drawdown and imagine how it would feel. Imagine taking it right at the start of trading a new system compared to taking it on the market’s money at the end of a great year. The last thing you want to do is tell yourself that a 30% drawdown is going to be acceptable when a 10% drawdown has you changing your pants.

This process is non-trivial, and it is unlikely anyone could finish it before the next post tomorrow (it takes me about a week). Flag this for later examination, tomorrow we move onto finding an edge and building an entry technique to exploit it.

Scott Phillips


About The Author
Scott
  • Dyellowflash

    Out of copper now at 3.014 shorted at 3.042. Waiting for another retracement to re-short.

  • Skynard

    Have decided to keep ZL as part of my trading plan and arsenal. My decision was solely based on arriving to the fact that coin is consistently being banked on my day trades but have been more sucsesful swing trading. Why fix something that isn’t broke:) Good luck trading rats!

  • http://ibergamot.blogspot.com/ i Bergamot

    I haven’t finished whole article yet, just got to part where you mention my Dow Paradox.
    Just to clarify, my little theory is not for short-tern index trading.
    You ask: “Is this belief helpful for trading”?
    I designed my System12 around it, backtested, forward tested and now fully running with real money (I am not a theoretician). System12 is a selection of certain stocks, not based on technical or fundamental criteria, with very simple entry/exit rules and common position sizing. These stocks a sort of index themselves, where market makes selection for me (and not miscreants from McGraw Hill). I don’t have a full year real results yet. Testing shows 20% per year, with 12% max drawdown. The development and implementation are documented in my blog.

  • Dyellowflash

    Is the zero down? note mkt opens an hr early due to daylight saving..

  • Dyellowflash

    I am not re-shorting copper for now as my dax gave 1 neutral and 1 buy signal. Waiting for the 2nd buy signal to confirm. Out of most shorts now.

  • SilverEagle

    Bottom falling out all zeros. How to read this? Wait for divergence/retest?

  • http://evilspeculator.com molecool

    Easy – don’t bet against a strong negative signal!!

  • http://evilspeculator.com molecool

    Oh they changed it this weekend in the U.S. already? Sorry – but it’s running now…

  • SilverEagle

    Not planning on betting against it – looking to see if any entries worthwhile but don’t want to bottom tick.

  • Dyellowflash

    A buy if 16334 Dow holds. I went long at 16337 n 41 already. A bit of pre-empt move, might have another re-test.

  • Dyellowflash

    Shouldn’t be posting my trades here, I have the same tots as skynard… but this could be an interesting reversal or a strong retracement. I am still holding April SPY puts and mostly June XLF puts, but 16334 is the top of the gap made last Sun-Mon, so if it holds and jumps, ST shld be going long – at least in the next 5-6 hrs.

  • aiki

    DharmaSeed.org – lots of links and dharma talks – I especially like Gil Fronsdal, Jopseph Goldstein.
    Thank you again Scott – getting me going in the right direction. Work to do…

  • http://evilspeculator.com molecool

    How is that different? Or are you talking about short entries?

  • http://evilspeculator.com molecool

    Happy to hear it! :-)

  • SilverEagle

    Yeah, i was talking short entry.

  • Skynard

    Have given it allot of thought, tightened up my egotistic batarama and harded the fuck up.

  • http://evilspeculator.com molecool

    Did you do your homework today? 😉

  • SilverEagle

    Did it last night. Day job has prevented me from doing it so far today. Still not trading /ES given my bias but saw the dip and adrenalin got flowing. Wanted to jot down what I was feeling and what my instinct was.

  • http://evilspeculator.com molecool

    Surely days like today are difficult – we get a stab lower and the signal follows along. I would NOT want to go long there. Then it suddenly turns and without any divergence. And you know what – that’s fine – the Zero hasn’t given us a reason to trade so we just let it play out. Always remember, we don’t HAVE to trade.

  • Scott Phillips

    Sounds like you stepped back from the blog to work on your game. Kudos

  • Scott Phillips

    Yes. Fortunately it is *just* work, like going to the gym. Sure it might be a big job, but people mostly seem to think trading psychology is just making a bunch of beginner trading mistakes and then stopping making them. It is NOT. Even with a really deep understanding of this stuff, I am absolutely capable of trading with poor psychology on any given day, and only a very structured program can keep me personally from harming my trading account. For example yesterday I took only one long trade on a 15min chart in EURJPY. It made my partial profit point and then reversed, stopping me out for a -.2R loss which kept me occupied through most of the day. At 7pm at night I was sorely tempted to take a reentry on that trade (which would still be active) but when I polled my internal state I was feeling frustrated that my results were not in line with my effort for the day. Being honest with myself I could admit that I was afraid of the trade taking off without me being on board and trading from an inherent place of fear. I have a little checklist for polling my emotional state and when I feel resistance to filling it out it is a sure sign I am tired/hungry/frustrated/scared/greedy/etc. I stood aside from that trade and reminded myself as an adult that the market offers an endless stream of opportunities and I have learned the lesson many times that working more than 14hr days means my performance will suffer tomorrow. I got a good night’s sleep and I’m back at it again

  • Scott Phillips

    How many average trades per year? How big are the winners? How big are the losers? What is the win rate? Do you know the expectancy (total R / number of trades)? There is huge scope for optimization of a system like this :)

  • newbfxtrader

    http://www.ustream.tv/recorded/44744093

    Goes well with the last two posts. His books are a good read.

  • Sentiment Updates

    Tracking this just for interest…we’re still in line with 2010. This morning it was deviating, then by the close it caught up. If it remains in play, the market should catch up by advancing strongly tomorrow to Thursday.

    One simple insight like this, traded to completion, was exactly how Paul Tudor Jones caught the crash of 1987.

  • Scott Phillips

    There is a daily hammer candle, which in the current environment is a decent long setup on break of the daily highs

  • http://evilspeculator.com molecool

    “my results were not in line with my effort for the day”

    That is a deeply flawed premise IMO. Results should not be measured by daily effort.

  • http://evilspeculator.com molecool

    Actually optimization in system development is a bit of a misnomer. It means one thing to some people and something else to others. To most retail traders it means experimenting with different parameterization and that quickly leads to form fitting. Instead I think he needs to go back to the basics and evaluate his requirements/beliefs and how exactly his system aims to deliver on those.

  • http://evilspeculator.com molecool

    RIP Chopper!

  • http://evilspeculator.com molecool

    Glad to see the place hasn’t completely gone to the dogs yet. But I did expect a bit more input regarding today’s post. Scott – perhaps it was a bit too fucking hippie after all? hehe

  • http://evilspeculator.com molecool

    FWIW – I enjoy playing the loudmouth critic this week. Feed meeee!!!

  • captainboom

    Just trying to drink from the fire hose boss. There’s a lot of info to digest the past couple of days. As you know, I’m not trading due to managing some personal affairs right now. I really appreciate what Scott is doing, so I’m saving off line for future reference.

  • Scott Phillips

    I’m writing todays post now. Super practical on the pros and cons of various measures of market type and the basic market principles which could be used to derive an edge and choosing an initial stop to backtest with pre-optimization. Listing out every edge I know. No more hippy bullshit, though I would encourage everyone to try 5 minutes of vipassana meditation before trading today as a test.

  • http://evilspeculator.com molecool

    Yeah, he disappears for six months and then he puts up 10,000 words posts. What does he think – I gonna pay him per word?? 😉

  • http://evilspeculator.com molecool

    I was just kidding mate – your house this week – knock yourself out. Just don’t burn the place down.

  • http://evilspeculator.com molecool

    FWIW – you’ve taken on quite a task this week. I hope everyone appreciates the effort.

  • Scott Phillips

    You know what a fucking hippie I am! Everyone has strong resistance to internal change, because we all get attached to our “personality” and have fears that if we change more than tinkering around the edges we won’t exist anymore. Sadly as I have proven to myself, the market is a TERRIBLE place for working out my self esteem issues, my relationship with wealth and self worth, and my relationship with my mother.
    Counter trend traders are driven by a pathological need to be right – Clearly harmful to trading. Traders who won’t keep proper records are driven by an insecure fear of being shamed by losing trades – clearly harmful to trading. Traders who won’t stick to a method and flip flop generally believe, at a deep level that they won’t be successful – again clearly harmful to trading.
    The problem with most traders approach to these issues is that if they just realize how much they are fucking up, they won’t do it anymore. The trouble is that it is the subconscious driving these errors, which creates psychological scarring (ever blown up an account? I can still feel the shame burning in my chest like a hot poker when I think about it) which doesn’t just disappear on it’s own.
    I say again. Ignore this stuff at your peril.

  • http://dartht.blogspot.com/ Gold_Gerb

    I didn’t know I was going to have to convert to Buddhism to make coin.

    how hard did you hit him?

  • Scott Phillips

    It’s a big task. I’m going to share every single thing I know about going from a losing trader to a winning trader, every single edge and thing I know about system design and then disappear again into the virtual night

  • http://dartht.blogspot.com/ Gold_Gerb

    ok, might as well join in the reindeer games..

    probably sucked the life out of the forum this week. (sarcasm)

    I believe “News doesn’t matter”.

    1)Comes from Mole
    2)Gets into Focus on price action only with high rewards based on ‘unexpected’ outcomes
    3)Gets out of The guessing game, subliminal biases

    I believe Losses are part of the Trade
    1)Comes from Ivan
    2)Gets you into ‘the cost of doing business’. It’s everywhere. Disconnect the emotion.
    3)Gets you out of ego based, i’m so good every trade is a win.

    I believe in having a trading plan

    1)Comes from Linda Raschke
    2)Gets into operational discipline, analyze afterhours, Execute open/intraday/close.
    3)Gets out of emotional trades including revenge trades, gets out of Deer-in-Headlights situations, gets out of Wish-I-Was-In, now Wish-I-was-out setups.

    I believe in Never saying Never

    1)Comes from personal experience in the flashcrash of 2010
    2)Gets you into an acknowledgement of black swans and Kurtosis understandings.
    3)Gets you out of pennies-in-front-of-a-steamroller scenarios.

    I believe in Never chasing a solitary candle

    1)Comes from personal experience. If the move is legit, the next candle will follow through.
    2)Gets you into patience, discipline, and checking your trading plan.
    3)Gets you out of the irrational discretionary buy/sell with those oh so famous headfakes & stovepipes.

    I believe the best things in Life are free, you just have to open your eyes.

    1)Some of the most valuable things came to me free of charge, it just took time to realize it. Some of the things that I thought were valuable, cost mere dearly, and are worth less.
    2)Get’s you into ‘keeping it simple’.
    3)Get’s you out of the endless Holy grail search.

    I believe in Don’t Fight the Tape.

    1)From Jesse Livermore “I lost most of my fur, but it was better to live to fight another day.”
    2)Gets you into surrendering early & cutting your loss.
    3)Gets you out of rationalizations for unexpected outcomes.

  • Scott Phillips

    Exactly so! But no amount of logic can stop me feeling the feelings of frustration and unease that arise from this situation. No amount of trading skill will stop me feeling frustrated when life doesn’t go the way I want. No amount of mindfucking will stop these feelings arising (and then passing naturally). I am deeply suspicious of people who claim to be so good at trading that these things no longer happen to them.

    Rather than choosing to ignore those feelings I embrace them in all their painful shittiness, but choose as an adult not to act on them and go get a good night’s sleep instead. I have structure in my external trading world around stopping the feelings of my internal world bleeding over and fucking my trading account.

    See http://www.seykota.com/tribe/Book/index.htm

  • Scott Phillips

    You don’t have to do anything of the sort :) But you *will* find that you bank more coin by working on your internal world – this is absolutely beyond any shadow of a doubt true. The meditation cushion and the psychotherapists couch are 2 good ways, but not the only ways to do this. I can only say what has worked for me. FWIW Eckhardt is probably one of the top 10 traders of all time and he runs a trading group which meets in person purely to work out psychological issues in trading. I’d look at that as a place to start, even if as just a chance to meet the great man and learn from him.
    I find it interesting that the greatest MECHANICAL trader of all time, devotes his old age to trading psychological issues rather than building better systems

  • Scott Phillips

    Nice! Do the same for “T theory”

  • Scott Phillips

    Try the belief paradigm – almost every belief has a positive and a negative side.
    1) Where did it come from?
    2) What does it get me in to?
    3) What does it keep me out of?

  • Scott Phillips

    Most likely as it is a “one size fits all” system which as we know produce mediocre results at best with large drawdowns

  • mugabe

    I would say that my beliefs come mainly from what I’ve read. Most influential has probably been quant lite stuff backed up by very extensive backtesting (mutli-.decade) on the part of the authors. My beliefs also come from the fact that I have made no money during one of the greatest bull markets in history, recgonising this fact, and that obviously something needed to be done! They also come from the realsiation / fact that personally I am better suited to longer term systems that only need to be monitored on a weekly basis.

  • http://evilspeculator.com molecool

    A cada uno lo suyo. As you know I prefer to punch people :-)

  • Sentiment Updates

    Well, I don’t have a direct response to the post because I don’t have a clear trading system beyond what I use to pick the individual stocks I own, which is a special kind of scan I created in Ninja Trader. The entries and exits are timed according to the indicator.

    My main belief system is:

    1) You should only trade the time frame your indicators excel at, and nothing more. If someone out there has an algo that works on a minute by minute basis, then by all means, stop making long term forecasts and forecast to the minute. My indicator set specializes at about a 1 to 3 year timeframe. I’ve generally failed at day trading or swing trading.

    2) There are two types of market activity regardless of time frame – trending and consolidating. You identify and trade each differently. Identifying a trend move and getting and staying on board quickly is one of the hardest things for me personally. Trading consolidations is relatively easy.

    3) Don’t always hedge, but always question your market position and play devil’s advocate. Hedge when you aren’t 100% sure until you are close to 100% sure what’s going on.

  • http://dartht.blogspot.com/ Gold_Gerb

    interesting little indicator, could be nothing.
    then again, that’s what I was thinking February 6th intraday. 100 freaking SnP points ago.

    http://stockcharts.com/h-sc/ui?s=$BPSPX&p=D&yr=0&mn=4&dy=0&id=p61511725933

  • itcomesupinwaves

    Nice post, one of the most important points is don’t revenge trade, which many people get sucked into

  • SilverEagle

    Gerb – what’s the setting on that? Is that Renko chart?

  • SilverEagle

    i can echo that sentiment of not capitalizing on the past 5 years.

  • captainboom

    Scroll down and you can see the settings. You can bookmark his link, and get an updated chart any time you want.

  • SilverEagle

    Yeah, that was total brainfart. Realized it 20 seconds after posting that. Tried to delete post but all Disqus does is turn it into Guest post versus actually deleting it.

  • phylum

    Repost….

    Extract from Ivan Krastins’ web site ProfitfromPatterns.com ……

    “The following points are based on a very broad survey that was done in the early 1990’s of literally hundreds of futures brokers who were exposed to thousands of traders. The brief was to establish what, in general terms, led to the demise of most of their clients. Putting it another way, what are the positive ‘guidelines’ that could assist you in attaining your goal to become a successful trader. Whilst there were many more than just the points below in the original survey, I have deleted many that doubled up on the same idea.

    I need to stress that these cannot be considered to be ‘rules’, as each individual has different circumstances, objectives, and personalities, not to mention risk capital. A mature aged trader would have very different goals to those of someone single in their late teens or a family person in their thirties supporting a young family. Additionally, please bear in mind that the survey was conducted before the current advent of keyboard (electronic) trading from home that has mushroomed in the last five years. Nevertheless, the points are still pertinent today.

    If you have been trading for a while, I am confident that you will recognise yourself in some of the points. If you are new to trading, this is your opportunity to learn from others, and perhaps save yourself the pain of making the same mistakes as others have before you.

    Without doubt, the major factor that causes traders to ‘fail’ is not having a trading plan, let alone a detailed back-tested trading plan.

    Another common factor amongst traders is their inability, emotionally, to allow their winning positions to continue, or to take losses quickly. Often fear of losing a profit leads to winning position being exited prematurely. Hoping that a losing position will turn around stops traders from accepting the small loss before it becomes a larger loss.

    Lack of discipline in sticking to their plan is also a shortcoming of many traders. When a position has been established, it is often the wrong time to address how that position will be managed, as the emotions of fear and greed often come into play.

    Trading on news announcements often leads traders to buy at a top or sell at a market bottom. This stems from the mistaken belief that markets react to the news in the popular press, and not recognising that, in many cases, the news has already been discounted by the market.

    A string of winning trades, especially early in one’s trading history, can also be a negative. This is especially true if the trader becomes overly confident, increases their position size and starts to believe that the next trade must be a winner too. It is all too easy to give back profits in the markets.

    One of the biggest downfalls of many traders is taking a position that is too large for their account size. This refers to the margins required in the case of futures, or using too much of their capital on a stock or option position.

    A natural trap for inexperienced traders with a small trading account is to want to increase it quickly by day-trading. This usually means trading for very small profits, but trading very often. The cost of doing business and slippage begin to play a larger role in the overall profitability factor.

    Lack of trade management is an area that often contributes to traders not succeeding. This includes things such as not defining (and sticking to) a predetermined amount of loss, adding to a losing position (also known as averaging) and not using stop losses.

    Having a trading bias (bullish or bearish) means that a number of valid trading opportunities are overlooked. After all, in most of the markets today, you can make money out of rises or falls in the price.

    Believing that the current trade is more important than the last one, or the next one, often leads traders to react emotionally to market movements – either in their favour or against. The concept of needing this trade to be a winning trade often means that it is hard for a trader to admit that they should exit the market, with a small loss or even with a small profit.

    The inability of a trader being able to accept a small loss and to exit the market often leads to a much larger loss. This loss may be either financial or emotional, or both. Lack of discipline is a real stumbling block for many traders.

    Once a position has been taken, many traders ignore new messages or signals from that market. Often this leads to a profitable trade turning into a losing trade, or a small loss turning into a much larger financial loss.

    Trading emotionally, or on a whim or gut feel, in the longer term is a recipe for disaster. Even allowing emotions to enter one’s decision-making process makes it far more difficult to follow a trading plan.

    Placing stop losses too close to current prices can mean that what is potentially a winning position turns into a loss needlessly. This is especially true if a financial stop loss is used when the entry has been based on technical analysis techniques.

    Starting with too small a trading account is a major cause of many traders not making the grade. This means that a trader has to decide which position is taken and which is ignored because of a lack of funds to take all the trades on offer.

    Trading more markets than a trader can handle simultaneously, either time-wise, account size-wise or risk-wise means that something has to suffer. It is usually the trader and their account that suffers.

    Being involved in thin or inactive markets is very dangerous. Whilst a position can be established, getting out can present a major problem. This is especially true when a position is moving against the trader rapidly, and the trader has to exit.

    A risk that is too large in proportion to a trading account means that only a few losing trades in a row may lead the account to dwindle to the extent where another trade cannot be taken. This is another form of over-trading.

    Trading the markets for action or excitement are all signs of a lack of discipline by a trader. This can lead to small losses not being taken, or not enough work put into analysing the markets.

    Not recognising that markets trend, and trying to trade against it, especially without stops are major causes of many large losses. Insufficient funds or poor money management techniques add to this dilemma.

    Trading in markets that are seen to be very speculative and exhibit large movements from one trading session to the next is another frequent mistake. Whilst all markets have the propensity to do that (especially some of the US futures markets), some are more prone than others.

    Whilst confidence in a trader is important, too much confidence, or bravado, can lead to disaster. This is especially true when combined with an overabundant dose of ego and a conviction that the market has got it wrong and the trader is right. Even a large account cannot remedy this situation at times.

    Making trades on the basis of rumours or tips is not a sound way to succeed at trading. Doing a trade based on ‘insider’ tips or knowledge is not only illegal, it also often leads to losses.

    Markets have become very inter-connected, especially in today’s global, electronic age. Not keeping an eye on global trends can lead to trades being taken at the wrong time.

    Not believing the price action and stubbornly sticking to one’s beliefs as to what a market should be doing, leads many traders to stick with a position far too long.

    Trading just one market can lead to impatience by a trader and hence lose the discipline to wait and stalk that market for a planned trading opportunity.

    Inadequate homework/research/testing by traders means that they really are ill-prepared to take on the challenge of trading the markets.

    Not spending the time to analyse one’s own emotional and psychological makeup leads to a trader not knowing themselves and hence not being aware of the type of market and trading approach that suits them best.”

  • tradem4alpha

    Since we are on the topic of meditation, what does it for me are binaural beats (although you need some very good speakers to hear the full range of the sound). Samples: http://www.collective-evolution.com/2013/10/15/how-to-get-high-without-drugs/; https://www.youtube.com/watch?v=9qeFClTZwNc#aid=P-WEaOoGASo.
    15-20 minutes of listening to these in a meditative state and I feel much better and my mind is clear.

  • phylum

    Bill Williams had “Sacred Cow Terminators” and was into autogenic training… an exert from his “Trading Chaos” which you all have read……

    “Trading from the how, we spend valuable time looking back in regret
    over past losses, while trading in the now, the past losses only exist for
    practical purposes and never as a source of pain or problems.

    As Diogenes said: Remember that real success is not measured by what
    you are driven to achieve, but what you quietly understand.” When you un-
    derstand that no one really knows who they are and what the market is
    about, you will stop looking for them to tell you who you are and what the
    market is. Charles Kettering once said, “The task is not to master the prob-
    lem but to make it give birth to the solution. Illumination is superior to
    domination.”
    ………………

    The secret of doing this is to walk away from trading the “How” into
    trading the “Now.” This passageway leads to the right hemisphere wherein
    lies your intuition, your insight, and your inspiration. Thinking and trying
    will never get you there because that is where you have been all the time
    and you did not know it. Simply remove the blindfold and look into the mir-
    ror. The blindfold is your habits and the mirror is the market.

    Before you turn to other people for help, honestly see if they have ever
    really helped themselves. Look at their wings, not their words.

    When you understand that no one really knows the market, you can
    stop looking for someone to tell you what it is.

    People always want you to be what they want you to be to please them.
    Be yourself and please yourself.

    Why do you want approval from those who do not even approve of
    themselves?

    When you know where you are going, you are free from the concern of
    where anyone else is going.

    If you do not leap, you will never know what it is to fly.

    If you are headed for the mountaintop, what do you care what the people in the valleys are doing?

    You can have a relationship with something you do not understand, but that relationship will always be on its terms (e.g., the market).

    Struggle trading is exhausting; inner trading is inexhaustible.

    If you allow others to tell you where you are going, then you must also depend on them to tell you what you will need for your journey.

    Let go and grow in the market.

    The only thing you lose when you let go of something you are afraid to live without is the fear itself.”

    Justine Gregory-Williams and Bill Williams. Trading Chaos: Maximize Profits with Proven Technical Techniques, 2nd Edition, John Wiley & Sons Inc 2004 p.48

  • Scott Phillips

    NEW POST! Took me a few hours to do this time!

  • Skynard

    Oh, indeed. Still catch some falling knifes but am concentrating on trend trades. The patience has paid me handsomely and am no longer worried about the little things.

  • Skynard

    LOL, thanks!

  • DollarChaser

    i know im a couple days late but im catching up. posting this here mainly for my own records.

    I believe in probability from candle patterns and price action.
    This belief –
    1) comes from mole/ES and my real life knowledge of mathematics.
    2) gets me into technical/ price action based trades
    3) gets me out of trading the news. looking for other trading methods.

    I believe the power of compounding is key to growing an account, it does something magic to the equation.
    This belief –
    1) comes from ES and my own calculations & fantasizations
    2) gets me into being disciplined with my position sizing. assessing & adjusting after every trade.
    3) gets me out of taking on too much risk when i think ive found a good trade in order to bank the most coin. searching for that ‘trade of the year’.

    I believe getting out of a trade is the important part, getting in is easy.
    This belief –
    1) comes from personal experience of watching winning trades turn to losers.
    2) gets me into thinking about exit strategies
    3) gets me out of becoming obsessed with entries, hoping for a trade that just keeping on moving in my favor.

    I believe trading is all about timing, there’s only two things to do, buy and sell. it just matters when.
    This belief –
    1) comes from personal experience, logic.
    2) gets me into second guessing my entries (after the fact) and not being fazed by a trade in loss (“its all about the exit” i say to myself)
    3) gets me out of some (what may be good) trades, makes me hesitant.

    I believe in keeping it simple, have as little on your chart and in your system as possible.
    This belief –
    1) comes from looking at mole & scotts charts. life experience, in general everything works best when kept simple.
    2) gets me into focusing all my attention on one or two methods. perfecting what i do look at.
    3) gets me out of searching for the next ‘great’ indicator. searching for correlation between indicators that doesn’t exist. finding a reason for every price move. fibs.

    I believe SMAs are useful for identifying inflection points and support / resistance.
    This belief –
    1) comes from mole & ES crew.
    2) gets me into watching for inflection points around the SMAs, expecting the SMAs to provide support/resistance.
    3) gets me out of taking on trades that i deem too dangerous because of an SMA nearby that i expect to work against me.

    I believe SMAs are most ‘respected’ when they are close to a 45 degree angle on the chart. too flat or too steep and the tape seems to bust
    through them effortlessly.
    This belief –
    1) comes from my own personal experience.
    2) gets me into turning on and off my expectations that an SMA will provide support/resistance. at times putting more emphasis on other entry strategies
    3) gets me out of being consistent with my trading, ill sometimes take on trades i otherwise wouldn’t & vies versa.

    I believe candlesticks are telling a story, not gospel but at least hints.
    This belief –
    1) comes from ES comments, mainly ivan & scott i think.
    2) gets me into trusting candle patterns and market research in terms of back & forward testing these ideas.
    3) gets me out of trying to identify other stuff, top & bottoms. trend & support/resistance breakouts.

    I believe there are times a system or setup will work and times when it just wont, ‘market weather’ if you like.
    This belief –
    1) comes from ES crew. confirmed by my own personal experience.
    2) gets me into more cautious trading, only getting into some trades if i think the weather permits. (eg. only taking a hammer setup in an up trend)
    3) gets me out of some trades that may have turned out profitable, because im not sure of myself.

    I believe i can trade profitably using just technical analysis. (which is great because i love numbers, and words hate me)
    This belief –
    1) comes from mole.
    2) gets me into reading the charts, focusing only on the charts. being able to look at my trades completely objectively
    3) gets me out of wasting time reading the news and trying to come up with reasons for every move. trying to predict prices and tape direction.

    I believe my own natural laziness (not my greed or fear or bias view) is the greatest threat to my trading account.
    This belief –
    1) comes from gut feeling and personal experience with trading and everything else in life. (studies, work, hobbies)
    2) gets me into being little more motivated because i know i naturally lack effort.
    3) gets me out of being over confidant and getting too far ahead of myself. i know i need to try extra hard.

    I believe i have a shit load more to learn about trading the markets.
    This belief –
    1) comes from own personal experience (failure)
    2) gets me into this good stuff!
    3) gets me out of trading with real money. (anymore)

    But most importantly i believe, i mean really believe that with enough effort i can and will become a successful career trader
    This belief –
    1) comes from gut feeling and personal experience of excelling in everything i really put my mind to.
    2) gets me into never giving up. and not being fazed by not being there yet.
    3) gets me out of spiraling into an abyss of depression and hopelessness.